Securities selection best suited to our asset allocation strategy
Qualitative securities selection, to us, means finding companies with solid and sustainable business models that we fully understand.
On the bonds side, we look for solid debtors who offer the right balance between opportunity and risk. On the equity side, we focus on market dominance and innovation – what we call “Schumpeter stock.”
“Schumpeter stock” denotes shares in companies who not only operate within monopoly-like structures (significant market power, high margins, and high entry barriers), but also have sustainable business models which generate across market phases relatively stable profits disbursed by and large as dividends. But “Schumpeter stock” means more than that. It also denotes companies who challenge traditional markets, are an innovative force to be reckoned with, and have strong growth metrics. Here, the decisive factor is not so much the dividends as it is growth.
Quantitative securities selection, to us, means, on the equity side, finding stock primarily based on risk factors: value (attractively priced), momentum (“past winners”), low beta (defensive stocks), and quality (companies with stable earning and cashflows). On the bonds side, we focus on credit risk premiums and market inefficiencies.
In contradistinction to classic selection criteria, risk factors offer, empirically speaking, more robust diversification and a more stable excess return. Risks are identified by means of a proprietary scoring model in which every risk factor is comprised of numerous data points.